The broad-based dollar rally continued to hammer the rupee even as forward premium remained elevated, indicating that the local currency could face further downward pressure.

The rupee closed at 69.87 a dollar on Wednesday, down from its previous close of 69.62.

The forward premium shot-up on Tuesday following $5 billion dollar swaps by the Reserve Bank of India (RBI). The central bank had to accept only five bids to cover the entire amount.

A rise in forward premium technically means that people are ready to pay any amount to hedge their long-term dollars at present rates as they fear the dollar would become costly.

The rupee’s continued spot depreciation did point to such an eventuality, even as the partially-convertible currency was not alone.

The rupee, nevertheless, was the highest loser in the day, falling 0.342 per cent. A spike in oil prices was the major reason for the fall, as India is a heavy net oil importer. But there are other fundamental reasons too.

“The rupee is weakening due to global reasons. The recent US data suggested that fears of a slowdown in the largest economy is fading fast, which also pushed up the 10-year bond yields to 2.53 per cent from 2.4 per cent and let dollar index to rally. Owing to Iran sanctions, oil prices are also climbing fast, whereas the portfolio flow in April has been much less than in March,” said Harihar Krishnamurthy, head of treasury at First Rand Bank.

Currency dealers say the rupee will remain under pressure in the coming days, but it won’t be a free fall.

“The world is relatively event free now, except for the oil prices. Besides, 70 is a strong resistance point. Nevertheless, by mid-May, the rupee should be around 70.50 a dollar level,” said Samir Lodha, managing director at QuantArt Markets Solutions.

According to Lodha, there is dollar in the market; otherwise the rupee would have seen a rapid slide by now.

In this scenario, making the forwards volatile could be problematic in the medium term. Surely, volatility in the forward rates, which is otherwise calm, has increased substantially after the announcements of the swaps in March.

In the second swap, the premium that the central bank received was 838 paise, which was equivalent to Mumbai Interbank Forward Offer Rate (MIFOR) of 6.33 per cent, whereas the secondary market was trading at 6.20-6.25 per cent. The three-year MIFOR rate on Wednesday was 6.70 per cent.

MIFOR is a mix of the London Interbank Offered Rate (LIBOR) and a forward premium derived from the Indian forex markets, used to price forward rates for derivatives contracts.

The spike in MIFOR has led market participants to question whether the central banks’ second swaps could be called a success at all.

According to currency dealers, non-banking finance companies or NBFCs that were actively raising three-year dollar funds from the overseas markets used the swap window to convert their dollars into rupees through intermediary banks.

“In the process, they made life difficult for genuine buyers of forwards for hedging. I don’t know any bank that had that much of dollars for the three-year duration to swap with the RBI so aggressively,” said a senior currency dealer with a bank.

Of course, the NBFCs badly needed this facility because of raising rupee liquidity from the domestic markets.

And even if they raised dollars from overseas, there is hardly any provider of three-year hedgers. At the same time, engaging in a three-year swaps by banks (on behalf of the NBFC clients) means that the banks don’t have to incur cost for any counterparty risk.